Cramer’s Dismal Data Center Track Record
January 24th, 2011 By: Rich Miller
Oh boy. Jim Cramer’s talking about data center stocks again. In the wake of last week’s selloff in shares of networking and cloud computing stocks, the host of CNBC’s “Mad Money” told investors to unload shares of colocation provider Equinx (EQIX). “I would be a seller of EQIX because I don’t think the data centers, the physical space, is going to grow the way people think,” Cramer opined during the “Lightning Round” segment of his show last Thursday (link via Paolo Gorgo).
It’s important to note that this is not the first time Cramer has warned viewers about data center stocks. On Oct. 22, 2009, Cramer warned his legions of CNBC viewers that the data center industry was ready for a fall. “Get out of the data center stocks,” Cramer told viewers. “I think the data center industry is in decline. I see an industry that’s about to be brought low by new technology, so I think you should sell, sell, sell.” We found the rationale for his prediction to be imbued with goofiness, and said so (See There’s a Village Somewhere Missing an Idiot for the full story).
For all those investors that followed Cramer’s “sell, sell, sell” recommendation, here’s what you missed:
It can be argued that Cramer was right so far as Equinix is concerned, as his early sell call averted the 25 percent plunge in October after the company lowered its guidance. Alas, selling a year earlier would also have missed several opportunities to sell above $106 a share.
But selling the whole industry, as Cramer advised? You’d have missed some great gains and major success stories. That includes cloud computing success stories like like Terremark (TMRK) and Rackspace (RAX) and turnaround stories at Internap (INAP) and NaviSite (NAVI) and content delivery plays like Akamai (AKAM) and Limelight Networks (LLNW).
My beef with Cramer is that his 2009 “sell, sell, sell” call was based on flawed logic (processor advances will empty data centers) rather than an informed opinion on supply and demand for colocation services. Like many tech investments, companies in the data center sector have often been volatile, with both gains and losses in industry bellwethers exceeding the broader market as trends shift.
That’s prompted valuation concerns about high-fliers like Equinix. Prior to last week’s selloff, there were plenty of investors and analysts who felt F5 Networks (FFIV) and Riverbed (RVBD) were ripe for declines after many months of steady gains.
Cramer is an entertaining guy, and there are sectors of the market on which he has legitimate insight. Data centers, alas, have not been one of them.
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I remember when Cramer was at TheStreet.com and he was a customer of mine (he owned the website at the time). He was entertaining then too.
The thing that I find somewhat humorous is that if you base a decision on the data center sector on processors instead of electricity, it’s like basing Google’s projections on number of searches vs. ad revenue.
The way I consistently explain to investors I talk to when they bring up similar questions about whether or not the industry is overbuilt or there is too much expansion is to point out that the first digital camera I owned was a 2 mega pixel Kodak. My new DroidX phone has an 8 MP camera in it. More mega pixels means bigger files, means more storage, more emails of vacations to send via email and post on Facebook. The point is that we create more data than we eliminate and we will need bigger filing cabinets as a result, along with place to put them.
Short term and in certain markets things may be overbuilt, but over the long term, we will always use more data center space than less and in the data center realm space = power.
[...] Cramer’s Dismal Data Center Track Record (From Data Center Knowledge) It looks as if CNBC’s Jim Cramer is back on his anti-data-center horse, advising viewers to sell stock fast. He might have been right about Equinix, but data center stocks are up big in general. [...]